How Valuation Works in Staffing
To value a staffing company, you have to assess the financial performance of the staffing firm over a period of 3 to 5 years. That means looking at the balance sheet, income statement, and more, to determine debt structure, historical cash position, net worth, gross margins, current pricing, EBITDA, etc. Below we list the most common types of valuations, as well as how to set the stage for a good one.
Common Types of Valuations
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Market Value Valuation/Comparable Transactions Valuation
A market-based valuation determines the value of business by comparing it to the value of similar businesses in the industry that have sold. In this way, it is a subjective approach to measuring value because it depends less on the specific business than current market conditions. It requires access to market data.
Ultimately, the worth of your business using this method is likely to be imprecise and will require negotiation if you are trying to sell your business. Because of this, you will likely want to combine it with another, more precise approach.
Discounted Cash Flow (DCF) Valuation
The Discounted Cash Flow method of valuation determines a business’s value based on its projected cash flow adjusted (discounted) to current levels. Unlike other methods, it takes into account inflation to consider the present value. This method can be useful if your company profits are not steady or not expected to remain consistent. On the downside, it can be time consuming and an extensive number of inputs are required.
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Asset-Based Valuation
The asset-based valuation approach looks at your balance sheet and takes your business’s total net asset value minus liabilities. There are two main approaches:
Liquidation Value
The Liquidation Value approach is used under the assumption that the company is closing and needs to liquidate all assets. The value is based on the net cash you would receive if available assets were sold. This will often be less than fair market value.
Going Concern
Conversely, the Going Concern approach is for asset-heavy businesses that plan to keep continuing operations. The formula considers a businesses assets minus liabilities.
ROI-Based Valuation
The ROI-based business valuation determines the value of your company based on your profit and the potential return on investment (ROI) for a buyer or investor. Like market-based valuations, it can be more subjective than others because a “good” ROI depends on market conditions. You will have to provide sufficient information to buyers or investors to convince them of the result you reach. They will want to know how long it will take to recoup the investment, what the return looks like, if the number is realistic, etc etc.
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Times Revenue Method
This method of valuation takes revenue generated over a certain period of time, and then multiplies that using a multiplier. Multipliers vary according to industry, economic climate, and other factors.
Seller’s Discretionary Earnings Method
This method is typically used for small business valuation. It helps buyers understand how much income they can expect to earn each year from the seller. Basically, in this method you need to determine how much cash it takes to run the business.
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Setting the Stage for a Good Valuation
Don’t be indespensible – the business needs to be able to continue on without you.
The right people in leadership roles – the business needs to be able to continue on without you.
Identify and quantify your assets – Not everything that makes your company valuable is on your balance sheet. Reputation and trademarks are both things that affect your sale price. Be prepared to make the case on why these things are valuable.
Prepare a confidential business report - A sleek, easy-to-read confidential business report is something that can help you when it comes time to sell. These typically include: a confidentiality disclosure, an executive summary, a brief outline of company history, operational overview and analysis, an organizational chart, market analysis and marketing plans, historic and recast income statement and balance sheet, and projections of future earnings.
Keep good and accurate financial documents – this will help immensely when it comes time to sell and buyers are poring over them.
Improve your cash flow – In anticipation of a sale, you can improve your cash flow position to increase the value of your business. Maybe this means acquiring outside financing, or rearranging assets.
On-Demand Valuation Webinar
Valuing Your Staffing Firm: A Primer
In this 40 minute webinar, John Larson from TechServce Alliance M&A Marketplace discusses how to maximize your staffing firm’s value for an eventual exit. He will help uncover the key factors that drive the valuation of a staffing firm and share what strategies and tactics owners and executives can successfully employ to accelerate growth and increase profitability throughout the lifecycle of a company.